Some of the benefits of paying off or paying down your mortgage early.
- Debt Free
- Peace of Mind
However, some investors may want to consider not paying down or paying off the mortgage early due to these cons.
- Lower retirement savings
- High cost for HELOC or Refinance
One of the main issues with paying down or paying off your mortgage early is that you may come up short in retirement.
This means you may not have enough money to sustain yourself in your retirement years. This may force you to work longer or live a different lifestyle than you had planned. It's likely you will need more money in retirement due to increased health care costs, hobbies, and travel.
One of the great benefits we have now is very low fixed mortgage interest rates. Also, let's say you have a 30-year loan at $4,000 a month In years 10-30 is your $4,000 worth more or less? Less! You will be paying off the mortgage with cheaper dollars in the future.
By not paying down the loan early you can then invest it and make the difference. Here are 2 reasons you may want to reconsider paying down your loan early.
- Cash Poor: God forbid you pay off the mortgage and need the cash.
- High Costs: Should you need to take the equity back out of the home the closing cost for a Home Equity Line of Credit or refinance can be very costly.
Below is an example I pulled from the SmartAsset site to compare and contrast the possible outcomes.
Let's say you're considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, you're 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.
That sounds great but consider an alternative. If you invested that money in an index fund that represents the S&P 500, which averages a rate of return on 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.
Would you rather save $8,300 in interest payments or possibly have $30,900 and flexibility? As you can see there are benefits from not paying down the mortgage early, and it allows for the flexibility to pay it off in the future as you allow your money to grow in the interim. This may allow you to be in a better financial position, and with a better financial position comes more financial flexibility. I think having flexibility offers a greater possibility for peace of mind, what say you?
Source: 5 Mistakes to Avoid When Paying Off Your Mortgage Early